Wednesday, December 17, 2008

In the past few months, the rise in the US$ against every currency except the Yen caught many speculators by surprise. Peter Schiff, Jim Rogers and many others who foresaw the recent troubles the US economy encountered were caught wrongfooted. On hindsight it become clear that as than money that was pulled out of risky assets from around the world when Lehman collapsed was mostly American and when converted back to US$ caused most other currencies to fall. The Yen rose because the Japanese investors were big investors in US and when they pulled their money out it caused the Yen to move up. The rise of the US$ was extended further as in the case of oil by speculative trend following hedge funds that will prounce on these movements and added on their bets as they profit from the trend.

Yesterday, Bernanke cuts interest rates to a range of 0-0.25% and issued a statement that they will do their best to prevent deflation. What will follow is quatitative easing : [Link] to fight the deflationary pressures. Bernanke is also known as helicopter Ben and his critics refer to his tactics as the "helicopter printing press". The Great Depression was a deflationary recession with falling prices. Bernanke, a respected scholar of the Great Depression, has written several articles [found here] that the Great Depression could have been avoided if the US Fed had ease monetary policy. It looks like Bernanke will flood the system with money turning on his "helicopter printing press". Deflationary has to be avoided at all cost because of the large amount of debt in the US - when deflation occurs debt becomes harder to pay back (read here for explanation of this).

I believe the US$ is positioned for a fall because all the factors supporting it in the past few months have disappeared - just like the large reversal of the oil prices which rose from 40 to 140 then the sharp fall to 44. There is a big price to be paid to avoid deflation. As Peter Schiff put it : what is the point of inflating away the debt when it will cost US$400 to fill your refrigerator with food. The price to be paid later is massive inflation. Given the Americans and their govt have borrowed so much to consume, there is just no way to avoid the pain of repayment. If the their currency debased by this helicopter printing press to pay off the debts, the Chinese and Japanese will simply get smart and stop lending them.

20 comments:

Anonymous
said...

Chinese and Japanese get smart and stop lending? Will that happen? I really doubt it. Where will they park their money then? In Singapore??Anyway, this analysis is awesome. All capitalist state and their newspapers will only say the US govt action is GOOD!

I think the US$ will fall, it should never have gone up in the first place. The reason it went up was because all the investors put their money out of the stock market and had to park it somewhere. As the reserve currency of the world, the US$ was it. However the US economy has went from bad to worse, and with massive job losses on the way (failed automaker bailout), it's hard not to see it falling

Thanks for another great article. I too think that US$ will decline but I am not sure of the rate of decline though. I mean, you cannot just print and print money and expect that currency to have the same value right?

It happened during the Roman empire where they use lesser and lesser gold to mint their coins which lead to hyper inflation and eventual collapse of the empire. Same as Germany during the 1920's and perhaps a re-run of that now?

last night's news in HK - HK Electric will cut tariffs by 5.9%, the first time in 10 years. This is a reflection of falling oil prices, and the need to help companies reduce electricity bills. Also to compete with CLP, who has already reduced their tariffs earlier.

This is despite the fact that HK Electric uses coal.

As it is, i have not been paying for my electricity bill for the last few months - as the HK govt is doing it for me. This was because they had a surplus budget and returning it back to their residents.

Don't forget that that exchange rates are a relative concept, so need to be sensitive to how much structural damage the financial systems of other developed countries may have sustained. This also includes the fiscal burden that these countries have to take on because of this damage. Notwithstanding all the problems in the US banking system, the size of banks’ balance sheet is much smaller in the US than in many other countries-SURPRISED!. For example, total bank liabilities are around 650% of GDP for Switzerland, 430% for the UK, 320% for the Euroland, 150% for Japan and 85% for the US. EM is just a leverage on US. In short, US is SHIT but the rest of the WORLD is SHITTY...and moreover, where is the alternative safe haven for the past 6 months? None other than US Dollar and even willing to get 0% to hold it, not even the GOLD which lost more than 50% before recovering recently. Investors should keep this fact in mind-Don't be one track minded!Jim Roger has been wrong (buy commodity) and Peter lost money for clients, so these investment giants may make a point but their point of entry could be wrong!One advice, ignore all and follow just the trend till it end...forget fundamentals!Nobody know the future!

um. this is totally off topic. but u might want to take a look at it. recently my friend bought into a hsbc "insurance" product. apparently it takes the money u pay them and invests it. the profits help pay for future premiums. its covered by all sorts of regulations and guarantees at the MAS too, just like any other accident and life insurance. but as the investments make profits, u pay less and less premium.. see. i think i understand risk pooling kind of insurance. but when u take the money to invest, u can lose money. and then what happens? MAS will pay for up to 90% of the insurance pay outs. i.e. MAS insures the insurer who is actually running a sort of pyramid scheme?

imbalances which had built up over the past five to seven years between the United States, which has run up huge budget deficits, and Asia, with burgeoning surpluses.

'We can't go back to where we were before, which is, Asians lend money to Americans... Americans borrow money to spend,' said Mr Lee. 'So how do we get savings and consumption back in balance?'

With the American consumer cutting back, someone else - whether the Chinese or the Indians - has to pick up the slack. The whole world would need to adjust to the new situation forced upon it by the crisis, he said.

The China Dailyhttp://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_315471.html

BEIJING - CHINA warned on Wednesday it would not keep lending money to the US economy indefinitely, even as new data showed it had consolidated its position as the top buyer of American government bonds. 'China's increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis,' the China Daily said in an editorial.

The warning from the state-run newspaper, an English-language daily that mainly addresses a foreign audience, came after the US Treasury Department reported a steep increase in Chinese holding of US Treasury bonds.

The China Daily said that, given the global economic crisis, the consequences would be serious if China and other nations stopped channelling money into the US economy.

'Interest rates in the US would rise to undermine that government's efforts to bailout distressed financial institutions and companies,' it said.

As the last bullet fires from his trusty MP005 (Monetary Policy), Ben ducks behind the bar counter, whispering the banker's prayer,

Hank Paulson, who art in Washington,hallowed by thy name.Thy fiefdom come,thy will be done,transfering wealth from Main St. to Wall St.Give us this day all your bread.And forgive us our debts,as we foreclose on those indebted to us.And lead us not into solvency,but deliver us from bankruptcy.For thine is the fiefdom, the power and the glory.For ever and ever. Amen.

It depend on what the rich people in America will do to protect themselves.They cana) keep their investment/money overseas in japan/india/china/vietnam.(with the extra option of moving there ie bill the gate)b) take their investment money back like what the Japanese did to USA.c) do the right thing invest internally and boost internal economy.d) utilize Protectionism(IE impose high tariff on imports while forcing their export to other country what Bushy is hoping for but pretending to oppose).However whatever happen.India and China growth will start to shrink unless they can find another country to export/sell to. But basically they forget about EU. Saudi perhaps? That why the two questionable growth engine are pushing for higher internal demand/consumption.Anyways, Japanese investors will start investing in their internal/ regional economy.IE probably Taiwan and South Korea and very unlikely China.

Paul Volcker is to be the chairman of Obama's Economic Review Board, what exactly this role will served remains to be seen, but there's two outcome to quantitative easing, either deflation is reined or should the recession have a lesser impact, inflation will be rampant, since the monetary base has greatly expanded.

The plan, I think, is to have Volcker as a rear guard, he is after all very qualified to advise on this aspect.

The dollar's parallel is the strength of the Euro, should the economic outlook within Euro zone picks up before the US or suffers less of an economic winter, the Euro strength will hold.

The recent strength of the dollar, after a two year slide, is a shortage of dollar in circulation, when the Treasury recapitalised banks, the money remains in the vault of Fed (where the minimum reserve is held), this is reflected by the effective rate being way lower than the target rate, since there's plenty excess reserve for banks to lend to each other (hence the recent cut has little meaning but reality check).

So when banks horde cash, the multiplier effect is gone, money in circulation contracts, value of dollar rises. Similar to the depression era, where banks allowed to fail, this also contracted the money supply, economic activity ceases, deflation sets in. The difference right now, sensibly, banks are keep on life support waiting for the eventual recovery.

Anyway I think a more straightforward view would be, currency is simply a store of value, and in fiat currency, its backing is the government that issues it, what's on its balance sheet, the value it holds is the number of notes in circulation.

A fine example is Zimbabwe, the govt is broken, while they haven't run out of paper to print money (as did Argentina). :D

The US housing market will bottom up and money will flow back there.How USD performs relative to other currency will depend on perception of US economy vs rest. If people think US economy will still come up better, than USD could maintain the strength.Delicate game for PRC/Japan holding majority of US' debt. They are squeezed. If USD falls sharply, PRC/Japan's own bottomline will be hit, and that will again affect the perceived relative strength of their currency vs USD.

Yes, he is a dangerous man, regardless of his mental state, just like terrorist. Lock him away but just make sure he does not jump out of a newly renovated toilet with a huge window without a grill and toilet paper of the floor outside to cushion his jump and then declare that he poses no immediate threat to the people.